Motley Fool Hidden Gems Investing - Trouble or Turnaround Plays?

Episode Date: March 5, 2024

We try to separate the falling knives from the buying opportunities. (00:21) Jim Gillies and Dylan Lewis discuss: - NYCB’s credit downgrade, material weaknesses, and current struggles. - Stitch Fix’s latest earnings, and whether the clothing company could be a turnaround play. - Why Jim likes the prospects for beat-up fintech company PROG holdings. (14:46) Alison Southwick and Robert Brokamp talk about trends in travel and tips if you’re trying to avoid the crowds and fees next time you step on a plane. Companies discussed: NYCB, SFIX, PROG Host: Dylan Lewis Guests: Jim Gillies, Alison Southwick, Robert Brokamp Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. Dylan Lewis. We're taking a look at three beaten-up stocks. Do they have what it takes to turn it around? Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Jim Gillies. Jim, thanks for joining me. Jim Gillies. Thanks for the invite, Dylan. Today, we're going to check in on a few companies that have a bit of a tough outlook and whether

investors should have them on their watch list. The first two come to us by way of the news, Jim. The first one we'll discuss is New York Community Bank Corp., shares at their lowest level since 1996 after the regional bank disclosed, something that investors never want to hear, and that's a material weakness in a filing. Jim, this is also a company that's had CEO changes, downgrades of its debt recently from Moody's and Fitch. Seems like a lot of things swirling here against NYCB. Well, and you've also left out the most important part, Dylan. This is a bank. I know. I like to state the obvious. This is a bank, and banks depend on the confidence of investors, and more importantly, the confidence of depositors.

now good news is no one has ever had a mass run on a bank and pulled their deposits from a financial institution at a time when when they need trust right oh wait that happens all the time in fact that happened a few times last year the name silicon valley bank or first republic i believe it was we're coming up on the anniversary jim oh i mean you know i didn't get you anything i'm sorry but you know i i have happy anniversary to all who celebrate i have many investing rules But one of the investing rules that I have when dealing with financials, if something starts to look like a bit of a contagion or basically once there's more than a couple pieces of bad news, all the bad news that's come out about this bank, the downgrade, the debt problem, material weakness, I would have hit the sell button so fast your head would spin. And the reason is because Silicon Valley Bank gives a wonderful example. Silicon Valley Bank from a year ago went from, hey, we're raising capital because we might be sort of kind of

insolvent. We're going to raise capital and sell these securities to dead in under 48 hours. I'm not saying that's what New York Community Bank is, but I am saying- Things move very quickly in the financial sector. things move very quickly. Lowest level since 1996 sounds bad. My rule is with a financial, with inherent leveraged companies, leveraged 10 to 1 or 20 to 1 or whatever, inherently leveraged financial institutions that require the confidence of depositors and shareholders, I'm out, I'm gone, and then I'll do the work to see if I overreacted and if I should get back in or not. But it's the same principle as if you were to engage in such practice, I don't recommend it

most of the time, but shorting a stock. Shorting a stock can be very profitable, it can be a very good thing. But the No. 1 rule of shorts I learned very early on, 20 odd years ago, something starts moving against your position, close it immediately, then go figure out why. Don't be a hero, you can always get back in if you need to, but get out of the way, then ascertain, wait for the dust to settle, wait for the fire to die down, whatever metaphor you want to use. I look at this company and I'm like, yep, lowest level in almost three decades. I say, well, why would I chase this down? There's no shortage of banks I can go out and buy. I've even got a couple of small regional banks that have been taken down by some of the negative news that's come out the last few weeks.

But one is a plain vanilla mortgage lender out of Ohio, hotbed of the housing bubble, I suppose. And the other one is a tiny community bank in the Pacific Northwest that's being bought out by another somewhat larger community bank in the Pacific Northwest that probably has some price support below it. I think they're being bought around $23, stocks around $21. If I was in the market for small regional banks or small community banks, I wouldn't be looking at NYCB, I'd be looking in areas where the banks, they've long stuck to their knitting, they haven't done anything terribly controversial, good capital ratios and just boring. Again, who doesn't get excited about plain vanilla home lending in Cleveland, Ohio. Jim, it sounds like, for you, NYCB is not

even approaching watchlist consideration. Nope. Our second beaten-up name that we're going to talk about on today's show also comes by way of the news. That's Stitch Fix. Shares down 18% after the company's second quarter results missed revenue estimates. Losses were wider than expected, and the company's guidance was revised down as well. Jim, this is a business that there's no secret that it's running into issues and has had issues for quite some time. We're about nine months into new CEO Matt Baer's time at Stitch Fix. He came over with a pedigree of working in customer relationships, digital officer over at Macy's. What do you want to be seeing from

Baer and the team there to be interested in this company? I've been unenthused. I want to talk about something where I'm happy. I don't want to be the guy that craps on everything. I'll give you that chance later. Thank you. Thank you. I feel that's what we're going here. Sorry, fools. Stay for the third ticker, I suppose. I am reminded of the Buffettism of when a business with a reputation of mediocrity meets a manager with a reputation for brilliance. It is usually the reputation of the business that persists. I think this is a failed business. I think it was a shameless cash grab by the people who brought it public. I don't know that Matt Baer can do anything, frankly, that

will make me excited here. When you see things like revenues falling 18%, they're calling for the next quarter to be down 20% plus minus. The full fiscal year, they're calling for 20% plus minus adjusted EBITDA. Remember, EBITDA is an adjusted accounting measure. It's not a real accounting measure. Now, apparently, in the last few years, we've all decided to do adjusted numbers. I thought that was the analyst's job anyway. But adjusted EBITDA, which translation is we're going to remove everything that we can be perceived as bad, so we could try to show some sort of a positive number. An adjusted EBITDA margin of 1-2% for fiscal 2024, they're halfway through the fiscal year. There's no cash generation. People have abandoned their services.

I don't know that there's anything that would get me interested here. If you can show me a path to real and sustained free cash flow generation, and then CEO Matt Baer starts intelligently deploying the cash that they generate. By that, I don't think they have any debt, I think they have a bunch of cash, so that's fine. But it's the CEO's job is to do capital allocation, that's literally in the resume. There's not really much you can do actually with capital allocation, it's really only five choices. You can reinvest the business for growth while this thing is dropping 20% a year. not too sure about the utility of that. You can pay off debt, they don't have any debt, thank goodness, financial risk at least is not a thing here yet. You can pay dividends and or

special dividends. You can buy back stock. Well, but for buying back stock to be reasonable, you should be buying it at a perceived discount to intrinsic value. I know there's a lot of companies that ignore that last part, but play with me here. Then I suppose you can make acquisitions. I just call this a failed business. Failed business goes out and acquires. I don't know that there's anything here that would get me excited. I'm going to point out the stock is down, what, 95% in the past couple of years? It's been an absolute massive sell-off. Yeah. Boy, I want to be sunnier than I am right now, but I'm not. I'm sorry. I would have no interest in this thing, and I don't know how you'd get me to a position of

of interest. I'm going to give you the opportunity to be a little sunny here as we wrap up, Jim. The News Fairy brought us those two as an opportunity to check in on businesses that were struggling. I'm going to get outside the news cycle a little bit here. I want to get a sense from you on a business that you're excited about that maybe doesn't have the narrative running its way, or maybe is more of a turnaround play in a lot of investors' eyes, but you think has a great path forward out of that. So, I'm going to give you a bit of an oddball one or one that's probably not very high up in most Foolish investors' thinking. A company called Prog Holdings,

very weird, P-R-O-G, all capital, of course, ticker symbol PRG on the New York Stock Exchange. This is the home of Progressive Leasing, not to be confused with Progressive Insurance, which provides and i quote web-based lease to own financing programs to credit challenge customers in order to facilitate the purchase of big ticket items i'm going to need you to unpack that just a little bit jim so imagine you are uh you know imagine you're you want to buy a new you know living room set couch and chairs but you don't have the coin you go to a store you say i'll buy it, buy rent-to-own, what have you. Progressive Leasing, aka Prague Holdings, they provide the financing for those types of leasing that you're going to get at these various places where

Progressive allows the business to take hold. This is an interesting company. It's spun out, or rather, actually. There's a company called the Ahrens Company. About three, three and a half years ago, Ahrens, which is basically like the showroom for the rent-to-own furniture. Progressive Aarons were together and Aarons spun off the Aarons Group and then changed their name to Prague Holdings, retained Prague. Prague Holdings, again, is the leasing thing. They promptly went out and they said, okay, we make a lot of cash, we've got a lot of cash we can deploy. We have no debt at the time, so they went out and borrowed some money and they bought a bunch of stock back. back. They bought like $600 million worth of stock back or what have you. They've continued

to buy about $30 million a quarter. Just put it in perspective, $30 million a quarter, Prague Holdings is a $1.4 billion company. $30 million is actually a real thing. It's material. Yeah. It's $120 million a year. They're they're using it pretty good. But they did that right before the credit cycle turned against them. Credit markets have gotten a little more, as interest rates went up, people got a little more tentative about the type of borrowing they wanted to do. Basically, credit, borrowing moves in cycles. That initial $600 million of stock purchases probably wasn't the best use of time or money. But since then, they have continued

to repurchase. Since being separated from Aaron's, they've taken down 36% of their stock. They just, in their most recent quarter, just initiated a dividend, $0.12 a quarter, it's about 1.7% yield, I think today. In the most recent quarter, they were a little dour and said, here's our guidance. But then they said, our outlook, and I'm quoting here, assumes a difficult operating environment with continued soft demand for consumer durable goods." They gave a bit of a dour picture, like Stitch Fix. The thing about their dour picture that I think is different from Stitch Fix's Dower Outlook is, again, credit moves in cycles. And you want to see a company, first of all, they're swimming in cash and capital. That's not a big deal. In 2023,

they made, my estimate, the way I calculate, my estimate, they made about $167 million in free cash flow. Again, it's a $1.4 billion company. That's pretty good. I think they're going to do another $160 million this year. The dividend is going to consume about $21 million, leaving the rest of it, $30 million, $35 million a quarter for buybacks, which management is all but proclaiming from the rooftops, that's what they're going to do. Stocks trading at around 10 times free cash flow. Again, the funny thing about cyclical companies or companies exposed to a cycle, in this case, the credit cycle, eventually things turn. When it turns and results actually jump up, they might have only 50% of the shares outstanding from the time they came public or

rather separated from the Aaron's core. So you're kind of playing a long game here. When will the credit cycle turn? I don't know. It'll probably be a Tuesday, but is that Tuesday next week or is that Tuesday in a year and a half from now? You don't and can't know, and that's okay. The point is, this is a company making a lot of cash, deploying that cash in the service of shareholders, trading for a more than reasonable bottom of cycle price. That I find very interesting. I think that's a perfectly sunshiny type take to wrap us up here, Jim. I do try. Thank you for bringing that stock and for bringing the methodology behind it to listeners today. No problem.

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Sign up for exclusive access today, rippling.ai slash fool. Coming up, Motley Fool Money's Travel Week continues. Allison Southwick and Robert Brokamp talk about trends in travel and tips if you're trying to avoid the crowds and fees next time you step on a plane. it's travel week here on the show and while we do love us some travel related stocks here at the motley fool why bother investing if you don't get to see the world with the returns you generated so let's talk about travel trends for 2024 what's in and what's out let's start with one trend that's in music tourism yep this is another trend you can thank taylor swift for musical tourism or

called gig tripping. As fans of T-Swift discovered, it's cheaper to just take whatever Aras tour tickets you can get and then fly there, even if it's in another country. The New York Times shared one specific story of a woman and her daughter from San Diego who, instead of driving three hours to Los Angeles and paying $1,900 for tickets, they just got tickets to the Mexico City show and paid less all in for hotels and flights, and they got to see a cool city. In the meantime, I personally have a friend who is taking her family to Paris and Germany to see Taylor Swift because those are the tickets they were able to get. Bro, you are shaking your head in disbelief. I can't believe it. But I know it happens,

but I can't believe it. Yeah. Now, of course, Swifties didn't invent the idea of traveling to see a band. I see you fish fans and deadheads, but there is something a bit unique here about the travel roulette of saying, I'll get tickets where I can and worry about the rest later. So is this just a flash in the pan Swiftonomics trend? We should probably do a whole episode on Taylor Swift economics, by the way. Or is this one trend sticking around a bit longer? Unlike watching football. I mean, who even talks about that anymore? Am I right? Yeah. All right. Well, let's move on to a trend that's out. Overcrowded destinations. Every year, FODORS makes a list of destinations you should skip. Venice tops the list in 2024, but it also includes Athens, Mount Fuji,

and Lake Superior, among many others. FODORS isn't saying they hate these places. They actually love them. But overtourism not only makes them crowded, it's also taking a huge toll on the environment. So it's truly a case of nobody goes there anymore because it's too crowded and you can find their complete go and no go lists on their site, which of course brings us to our next trend. Well, I'll tell you what's in fees for entry. That's right. And in that maybe we wishes was out Venice, which was on the verge of being considered an endangered city by Inesco will begin charging visitors five euros for an entry fee starting in April. Bali just started charging visitors about $10 a day to help pay for cultural programs and cleanup costs. And Amsterdam will be

imposing the largest tourist tax in Europe in 2024, upping the tax on hotel rooms from 7% to 12.25%. Iceland is also pondering a tax in 2024 for visitors, but has yet to set a price. So all of these places are getting so over-touristed and you're paying more to visit them which brings us to our next trend yeah and this one i think is kind of funny and it's an in-trend of dupe travel yep 2024 is the year of dupe travel that's according to expedia instead of visiting the over-touristed and likely more expensive locales you can find recommendations online for places that are similar just less crowded and less expensive For example, Expedia says, instead of Santorini, go to Paros, Greece.

Instead of Seoul, go to Taipei. Instead of Geneva, go to Quebec City, Canada. These recommendations and more can be found on Expedia's Dupe Travel 2024 report, and then also all over social media like TikTok and Instagram. Now, some of the recommendations are a little laughable, like the New York Times saying, instead of going to Paris for the Olympics, you can go to Cleveland or Indianapolis. These cities are hosting the Olympic swim team trials and the Pan America Masters Games. So yeah, Indianapolis, the Paris of Indiana. You'll

hardly notice the difference. All right, let's talk about the ins and outs of fees and fares. Yes, fees and fares. United American, Alaska, and JetBlue all raise their prices to check a bag by about $5 to $10 more. Why? Because they can, and it's a huge moneymaker for them. Airlines pull in over $5 billion, with a B, annually from checked bags, according to the Department of Transportation. Southwest, however, is the outlier, according to CNBC. They allow customers to check two bags for free, and their COO says that's the way it's going to stay. When it comes to booking flights, Kayak says domestic airfare will be down 16%. percent. International airfare will be up 10 percent. And Kayak recommends booking international

travel eight months out for the lowest fares. You can also try to save money by traveling during shoulder season months, which are March to early May and September to early November. If you must travel during peak times, such as spring break, may the travel gods have mercy on your wallets. That's the truth. All right, let's move on to our final trend. And it's one that's in whatever's on your TV. Yes. Another trend spotted by Expedia is people wanting to visit a place after watching a TV show or movie. For example, the first two seasons of HBO's White Lotus drove a 300% increase in travel demand for Hawaii and then Sicily. FX's The Bear even spurred a 45% gain in searches for travel to Chicago. And it's not like they even show a really glamorous

side of Chicago. So what TV shows and movies are going to get people off their couches or at least looking up flights on their phones? Well, White Lotus is back and based in Thailand. Season eight of Outlander will send people running for the Scottish Highlands and Gladiator 2 will be set in Malta, which I can attest to is a lovely place with phenomenal food. So if you want to avoid the crowds, save those places for another year. All right. Well, before we go, let's leave you all with our own travel recommendations. Bro, what is your hidden gem that you would like to recommend to listeners? I have a few thoughts about this. First of all, second, Quebec, great place to visit. And if you were like us driving up the East Coast, like I do with my family, we stayed at a

fun family resort type place in Vermont and then went on to Quebec. So that was a great visit. It's been a while since I've been there, but I think Central and Eastern Europe are still, if you're looking for lower prices and smaller crowds, that's the place to go. Two places that I've been to that I really liked. One is Karlovy Vary, which is a spa town about two hours east of Prague. Then Krakow in Poland, which is a lovely old town. A little harder to get to, but a lot of World War II history there. Then the final thing I'll point out is that my daughter got married in Rome last summer. I'll just second that, boy, if you go to the big places in the middle of summer, it's just crowded, crowded, crowded. But what she and

her husband now do is, basically, they're digital nomads all over that area of the country. They have worked from Spain, Turkey, Cyprus. They'll eventually be going to Africa. They've been able to live on a smaller budget than what it costs them to live in the States through all kinds of travel hacks. For example, right now, they're living rent-free in a London suburb, house-sitting and pet-sitting for an older couple who went on vacation, which is just an arrangement they found through a website. Definitely lots of possibilities to travel a little cheaper if you can find them. Well, my recommendation is a little island in the inland sea of Japan called Naoshima. This is an island that I believe the story is,

and I'm probably going to mess this up. So everyone write me if I, who knows better. Essentially this gentleman was born on this small sort of fishing island in Japan. He later left and became a bajillionaire and he decided to return to the island and turn the whole place into sort of a destination for art. There's architecture by Taro Ando. There are a few very big galleries like the Chichi Museum. You can see a couple of Kusama pumpkins

and go up and hug them and get your super trendy pictures taken with them. They have a room full of Monet's, which is really cool. And one of my favorite parts about this island is that they took in the village, I believe like seven different houses and they gave each house to a different artist.

And so you can walk around the town and then just pop into a house and the whole house is an art installation. And so it's just a very cool island dedicated to great art. It's not necessarily super easy to get to, but I highly recommend it. As always, people on the program may own stocks mentioned

and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.